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David Casper

David Casper, Eide Bailly, Fargo, N.D.: Why your business needs to review its sales-tax practices

FARGO, N.D. – The U.S. Supreme Court’s recent decision in South Dakota v. Wayfair has led to a new focus on state and local sales-tax compliance. Think your business doesn’t have to worry? Think again. Sales and use tax just got a whole lot more complicated.

As a business, you must reconsider your sales tax responsibility and re-evaluate how you’re collecting sales tax. This is especially true if you are a remote seller or online retailer, or if you operate across state borders.

THE RULING

In 1992, the Supreme Court issued the Quill decision, which barred states from requiring sales-tax collection from sellers who did not have physical presence in the state. In 2016, South Dakota passed legislation that directly challenged this decision. The new legislation was unenforceable because of the Quill decision, and the case – South Dakota v. Wayfair – was brought before the Supreme Court.

In June, the court ruled in favor of South Dakota. The Wayfair ruling holds that physical presence is no longer required for a state to impose sales and use tax.

This ruling is important because it lets states collect sales tax from out-of-state sellers that don’t have physical presence in-state.

THE SITUATION

Currently, there is no consistent compliance requirement. But the Wayfair ruling has many states considering new laws related to sales tax compliance for out-of-state sellers.

Here’s a look at our tri-state area:

  • South Dakota

South Dakota’s standard states that a business must collect South Dakota sales and use tax if the company:

  1. Has annual sales of $100,000 or more in South Dakota, or
  2. Has 200 or more separate transactions in the state.
  • North Dakota

North Dakota’s standards are similar to those in South Dakota.

  • Minnesota

Minnesota has unique thresholds for “economic nexus,” which is the tax-law term that

describes which companies in a state must collect and pay taxes on their sales in that state.

In Minnesota, remote sellers must collect sales tax when their annual sales total either:

  1. 100 or more retail sales shipped into Minnesota, or
  2. 10 or more retail sales shipped into Minnesota that total more than $100,000, and
  3. Threshold calculations do not include wholesale sales.

WHAT YOU SHOULD DO

The Wayfair ruling has disrupted the way businesses should evaluate their sales tax collection responsibilities. All businesses operating across state lines need to seriously evaluate those responsibilities.

Most states have specified a date in 2018 as the new rule’s starting period. This means if you met the threshold in 2017 or at some point in 2018, you need to begin following the sales tax collection and compliance rules for the states in which sales are made.  

It is important to know the rules for each state, as they vary.

It is the seller’s responsibility to keep detailed records tracking the sales made, the amount of taxable transactions and the amount of non-taxable or exempt transactions. This should include all types of sales, as it unclear in many states which sales count toward the economic nexus threshold.

Here are a few other steps to consider as you work to comply with the new sales- and use-tax rules:

Economic thresholds: Review your sales by ship-to state to understand where you’re doing business. Also, know what your current thresholds are in each state.

Physical presence: Determine where your business has physical presence through employees or inventory. This includes inventory in third party warehouses such as Amazon.

If you have existing physical presence in a state and are not currently collecting tax there, speak with your tax advisor regarding voluntary disclosure programs before taking any action.

Don’t do it alone: Talk to your business advisor about next steps for your business. He or she can help you determine the best way to handle compliance with the new thresholds and rules created.

The impact of the Wayfair ruling will continue to have a ripple effect on businesses and state sales-tax compliance. It’s important to begin the conversation now and consider how this ruling will impact your business, as well as how to avoid the consequences of non-compliance.

David Casper

Manager, state and local taxation

Eide Bailly

Fargo, N.D.

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